Tag Archives: Bezos

More Accounting Games At AMZN

On January 31st, Amazon reported an expected “beat” for Q4 revenue and net income. After the headline report hit the tape, the stock soared $59 to $1777 from the closing price ($1718) minutes earlier. But then the stock began plunging. It closed the after-hours session at $1635, down $142 from the earnings headline spike and down $83 from the NYSE close. The Company guided Q1 revenues down below the consensus estimate. Amazon’s Q4 numbers also reflected a slow-down in revenue growth.

I predicted Q4 would show slowing growth based on the fact that AMZN enjoyed four quarters of year-over-year comparisons which included Whole Foods numbers for Q4 2017 to Q3 2018 vs comparable year-earlier quarters which did not include Whole Foods numbers (A GAAP rule-change allows companies to avoid restating historical numbers after a big acquisition – this enabled AMZN to report 3 quarters in 2018 with WF numbers but leave WF numbers out of historical financials). Q4 2018 is the first year-over-year quarterly comparison which was an “apples to apples” comparison of the numbers. And AMZN did not disappoint me by disappointing.

If the AMZN Einsteins on Wall Street are aware of the Whole Foods accounting gimmick, they certainly never mentioned it in their analysis, which probably explains why AMZN’s stock is down 6.4% since reporting Q4 while the SPX is up 2.6% in the same time period.

AMZN’s year-over-year revenue growth rate for Q4 came in at 19.7%, the slowest growth rate since Q1 2015. If AMZN revenue comes in at the mid-point of Q1 2019 guidance ($58 billion), it would represent a year-over-year growth of rate of 13.6% – the slowest revenue growth rate since 2001.

I noticed an interesting development in AMZN’s numbers which the analyst community will no doubt overlook or fail to see. AMZN’s gross margin jumped from 37.1% in 2017 to 40.3% in 2018. This made no sense given that Whole Foods’ gross margin was running about the same as AMZN’s prior to the merger. The obvious place to look for gross margin accounting manipulation (understating cost of goods sold) is the balance sheet. Property, plant and equipment jumped 27% from 2017 year-end, or $13 billion. This increase is not attributable to the WF acquisition because the 2017 year-end balance sheet would reflect the WF acquisition. I also noticed a 27% jump in “other assets.” Other assets contains the “intangible” value of video content acquired.

While I can’t prove this without seeing the inside books, I would suggest that the likely explanation is that AMZN is capitalizing costs that should be expensed in the year the costs are incurred. I would also bet that AMZN has slowed down the rate at which it depreciates its media content. This is the primary source of accounting manipulation utilized by Netflix. Capitalizing expenses and slowing down the rate of depreciation has the effect of reducing cost of goods sold and increasing gross profit, thereby increasing the gross margin.

A counter-argument would be that AWS continues to grow at 40% and is a high margin business. However, AWS revenues have been running about 10% of AMZN’s revenue base for quite some time. Thus, while AWS’ business might contribute to a small improvement in AMZN’s gross margin, a 300 basis point jump in one year is too good to be true.

I would suggest that AMZN altered its cost recognition accounting in order to offset slowing revenue growth with a higher reported gross income, which translates into higher operating and net profits. This enables AMZN to “beat” earnings estimates – at least in the short run.

As I’ve detailed in the past and in the Amazon dot Con report (available to Short Seller’s Journal subscribers), AMZN presents its “free cash flow” in a non-GAAP format in order to make it look like the business model generates a lot of free cash flow. As AMZN discloses in a footnote buried in the 10Q/K, its presentation for free cash flow is non-GAAP. At the bottom of its statement of cash flows from operations is a section titled, “supplemental cash flow information.” This section includes “property and equipment acquired under capital leases” of $10.6 billion and “property and equipment under build-to-suit leases” of $3.6 billion. Together, this is cash spent during 2018 of $14.2 billion.

These expenditures have been growing annually for many years and should be netted out from AMZN’s “investing activities” section in the statement of cash flows. Subtracting the $14.2 billion from the cash used or provided by operations, investing and financing yields negative $3.4 billion. This is the actual “free cash flow” generated by AMZN’s operations in 2018 vs. the  positive $11.6 billion “free cash flow” number shown on page 1 of AMZN’s Q4 earnings presentation.

One last point. My biggest contention is that AMZN’s revenues are driven primarily by the attraction of 2-day free delivery for Prime members. Stripping away AWS from AMZN’s revenues and operating income gives AMZN a 2.5% operating margin. This is about half of the operating margin generated by AMZN’s comparable competitors like Walmart, Target and Best Buy. Most of that 2.5% operating margin is attributable to Whole Foods. AMZN’s cost of fulfillment (the cost of getting a product from the “shelf” and delivered to the buyer), surged to 25.6% of revenues from 22.8% in 2017. In 2010, before Prime really began to take off, AMZN’s cost of fulfillment was 13% of revenues.

AMZN’s e-commerce business barely generates an operating profit (international e-commerce generated a $2.1 billion operating loss in 2018). If we could calculate a net income for just e-commerce, it’s likely that AMZN would show a net loss. As the rate of AMZN’s revenue growth slows, the cost of fulfillment is going to consume AMZN’s operating margin.

My point is that AMZN stimulates e-commerce sales with the allure of free 2-day shipping. AMZN’s stock price keys off revenue growth. Unless AMZN can keep revenue growing at historical rates, the stock price is going to reprice down to a multiple based on a hybrid cloud computing services and retail business. The growth rate in Prime subscriptions has been the “holy grail” of AMZN’s revenue growth rate. But the growth rate in Prime memberships plummeted to 26% year-over-year in Q4, down from 50%+ growth rates historically.

AMZN’s stock trades at an eye-watering 65x operating income. It trades at 76x trailing EPS. Keep in mind that there’s a good argument to be made that AMZN stretched its GAAP income measurements with accounting games that reduced cost of goods sold and increased operating/net income. The jump in gross margin is a one-time event and likely not sustainable. Perhaps Bezos will plan another big acquisition in order to keep kicking the accounting indiscretions down the proverbial road.

Regardless, the stock remains insanely overvalued. As a comparison, Walmart trades at 22x operating income and a P/E of 18. Target trades at 9x operating income and a P/E of 11. AMZN’s stock price could get cut in half and it would still be overvalued relative to retailer comps. That said, AMZN’s stock price will likely trade directionally with the stock market, although it will outperform to the downside when the bear market resumes.

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Amazon Is Desperate To Generate Sales Growth – Why?

I’m already fatigued and disgusted with Christmas promotions. They’re everywhere now, including every other ad on television.   I’ve come to loathe the holiday season because of the extreme materialism and consumerism into which it has degenerated.

That said, Wall Street has overlooked or ignored an interesting aspect reflected in Amazon.com’s Q3 earnings circus.  Amazon is now desperate to generate sales growth.  The Company announced that it waived the $25 minimum spending requirement for free shipping during the “holiday season.”  This move devalues the $119 annual fee for a Prime account, other than the fact that non-Prime free shipping will be regular mail rather than 2-day.  As a colleague remarked,  “at least for the holiday season Prime becomes nothing more than low-level streaming service.”  Moreover, the free shipping will annihilate AMZN’s gross and operating profits.  

In 2001, FASB removed the “pooling” method of accounting for mergers which required the financials of the combined entity to be historically restated to reflect the numbers from both companies.  From Q3 2017 to Q3 2018, AMZN optically has generated a huge year-over-year quarterly growth rate because AMZN’s income statement prior to late Q3 2017 did not include WF numbers.  This fact is buried in a disclosure in the SEC filings but, of course, not mentioned by analysts or the dopes on financial television.

But AMZN will be hurt going forward because every quarter, starting with Q4 2017, contains a full quarter of Whole Foods numbers. The consequence of this for AMZN is that, optically, the “growth rate” in AMZN’s revenues will fall significantly in year-over-year quarterly comparisons. Thus, the year-over-year year quarterly comparisons thru Q3 2018 show a much higher growth rate visually even though the comparisons are not “apples to apples” (e.g. Q2 2018 included WF numbers, Q2 2017 did not). Going forward, WF’s numbers will “dilute” the growth rate of AMZN’s revenues. One of the reasons AMZN’s stock was massacred in the previous week’s market sell-off is because AMZN guided the Q4 growth rate lower.

While some of AMZN’s competitors – like Target – are offering free shipping without a spending requirement, the move by Amazon is a act of desperation designed to generate sales growth.  AMZN’s stock price is and always has been tied to revenue growth rate.  Anyone who has bothered to pull apart the financials to the extent I have knows that AMZN burns cash every quarter.  I opined a few years ago that AMZN’s stock would be demolished once the Company reaches a point at which sales growth approaches zero or declines.

AMZN’s stock plunged $252 (14.1%) in the first three trading days after AMZN reported Q3. It would have tanked even more if it wasn’t “saved” by the massive short-squeeze rally last week.  But it’s down another 4.1% today – after hitting its head on its 200 dma.  If the stock market heads south, the decline is AMZN’s stock price is just getting started…

Amazon And Tesla Reflect Deep Fraud Throughout The Financial System

Not much needs to be said about Tesla.  Elon Musk’s performance on the Company’s conference call speaks for itself.  He basically told the lemming analysts who have been the Company’s Wall Street carnival barkers to go have sex with themselves in response to questions looking for highly relevant details on Model 3 sales projections and Capex spending requirements.

I believe Musk is mentally unstable if not mildly insane.  He would do the world a favor if he gathered up what’s left of his wealth and disappeared into the sunset.  When Tesla collapses, I hope analysts like Morgan Stanley’s Andrew Jonas are taken to court by class-action hungry lawyers.  My response to something like that would be justified schadenfreude.

Amazon is similar story on a grander scale of accounting fraud and fantasy promotion. AMZN reported its Q1 numbers Thursday after the close. It “smashed” the consensus earnings estimate by a couple dollars, reporting a questionable $3.27 per share. I’m convinced that Jeff Bezos is nothing more than an ingenious scam-artist of savant proportions, as this is the second quarter in a row in which AMZN reported over $3/share when the Street was looking for mid-$1 per share earnings.

I bring this to your attention because there’s something highly suspicious about the way Bezos is managing the forecasts he gives to Street analysts. Every company under the sun in this country typically “guides” analysts to within a few pennies, nickels or dimes of the actual EPS that will be presented. For the Street to miss this badly on estimates for AMZN two quarters in a row tells me that Bezos is intentionally misleading the analyst community, which typically hounds a company up until the day before earnings are released. Food for thought there.

I don’t want to spend the time dissecting AMZN’s numbers this quarter in the way I have in
past issues. This is because the earnings manipulation formula remains constant. One interesting detail that Wall St. will ignore is the fact that AMZN’s cost of fulfillment as a percentage of product sales increased to 24.6% vs 19.7% in Q1 2017. It cost 25 cents per dollar of e-commerce revenue vs 20 cents per dollar of revenue a year ago to deliver an item from the warehouse shelf to the buyer’s door-step. Apparently all of the money Bezos spends on fulfillment centers ($2.3 billion in Q1) is not reducing the cost of delivery as promised.

The financial media flooded the airwaves with hype when Bezos announced that AMZN Prime had 100 million subscribers. However, the fact that the cost of fulfillment increased 500 basis points as percent of revenue generated tells us that AMZN is losing even more on an operating business on Prime memberships. I love ordering $10 items that are delivered in 2-days because I know that AMZN loses money on that transaction.

For “product sales” in aggregate (e-commerce + Whole Foods + the portfolio of crappy little service businesses) the operating margin increased to 1.16% of sales vs. 0.3% of sales in Q1 2017. HOWEVER, in acquiring Whole Foods, AMZN folded a 5% operating margin business into its revenue stream. It should have been expected that AMZN’s operating margin would increase this year. I’m surprised that folding in a 5% business did not boost AMZN’s operating margin even more. See the cost of fulfillment. In effect, Bezos used positive cash flow from WFM to subsidize the growing cost of Prime fulfillment. I also suspect that Bezos will be running WFM’s margins into the ground in an effort to boost revenues. The prices of WFM’s house-label brands were slashed immediately. AMZN’s stock is driven off of revenue growth and Bezos does not care if that means sacrificing profitability.

What’s mind-blowing is that big investors have let him get away with this business model for nearly two decades.  If the Fed and the Government had not printed trillions starting in 2008, Amazon’s grand experiment would have expired.  More than any company or business on earth, Amazon is emblematic of a fiat currency system that has gone off the rails combined with Government-enabled fraud of historic proportions.

So far, AMZN has not segmented the revenues from the WFM business in its footnotes. I doubt this will occur despite the fact that it would help stock analysts understand AMZN’s business model. Again, the conclusion to be made is that Bezos will push WFM’s operating margins toward zero, which is consistent with the e-commerce model. Hiding WFM’s numbers by folding them into “product sales” will enable Bezos to promote the idea that Whole Foods is value-added to AMZN’s “profitability.” In truth, I believe WFM was acquired for its cash – $4.4 billion at the time of the acquisition – and for the ability to hide the declining e-commerce margins for a year or two.

In terms of GAAP free cash flow, AMZN burned $4.2 billion in cash in Q1 compared to $3.6
billion in Q1 2017. Again, this metric helps to prove my point that Bezos sacrifices cash flow in order to generate sales growth. Not only does AMZN now have $24.2 billion in long term debt on its balance sheet, it has $22.2 billion in “other liabilities.” This account is predominantly long-term capital and finance lease obligations. This is a deceptive form of debt financing, as these leases behave exactly like debt in every respect except name. One of the reasons AMZN will present “Free Cash Flow” at the beginning of its earnings slide show every quarter is because it excludes the repayment of these leases from the Bezos FCF metric. However, I noticed that AMZN now sticks a half-page explanation in its SEC financial filings that explains why its FCF metric is not true GAAP free cash flow. A half-page!

In effect, AMZN’s true long term debt commitment is $46.4 billion. Funny thing about that, AMZN’s book value is $31.4 billion. One of the GAAP manipulations that AMZN used to boost its reported EPS is it folded most of the cost of acquiring WFM into “Goodwill.” Why? Because goodwill is no longer required to be amortized as an expense into the income statement. For presentation purposes, this serves to increase EPS because it removes a GAAP expense. Companies now instruct their accountants to push the limit on dumping acquisition costs into “goodwill.” But most of the $13 billion in goodwill on AMZN’s balance sheet was the cost of acquiring WFM, which required that AMZN raise $16 billion in debt.

Regardless of whether or not WFM is profitable for AMZN over the long term, AMZN will still have to repay the debt used to buy WFM. In other words, the amount thrown into “goodwill” is still an expense that has be paid for. For now, AMZN has funded that expense with debt. If the capital markets are not cooperative, AMZN will eventually have a problem refinancing this debt.

In summary, the genius of Bezos is that he’s figured out how to generate huge revenue growth while getting away with limited to no profitability. Yes, he can report GAAP net income now, but AMZN still bleeds billions of dollars every quarter. It’s no coincidence that Bezos’ scam mushroomed along with the trillions printed by the Fed tat was used to reflate the securities markets. For now, Bezos can get away with telling his fairytale and raising money in the stock and debt markets. But eventually this merry-go-round will stop working.

The tragic aspect to all of this is that a lot of trusting retail investors are going to get annihilated on the money they’ve placed with so-called “professional” money managers. I don’t know  how long it will take for the truth about Amazon to be widely understood, but Tesla will likely be a bankrupt, barring some unforeseeable miracle, within two years.  Perhaps worse is that the fact that people appointed to the Government agencies set up to prevent blatant wide-scale systemic financial fraud like this now look the other way.  It seems the “paychecks” they get from the likes of Musk and Bezos far exceed their Government pay-scale…

When you see that men get richer by graft and by pull than by work, and your laws don’t protect you against them, but protect them against you–when you see corruption being rewarded and honesty becoming a self-sacrifice–you may know that your society is doomed.  – Francisco D’Anconia “Money Speech” from “Atlas Shrugged”

Amazon.com’s Accounting Pornography

I wrote the following analysis on Amazon.com’s GAAP accounting manipulation for Seeking Alpha…

Amazon.com (AMZN) released its earnings on Thursday, February 1st after the market closed. The headline net income number was $3.85/share. This blew away Wall Street’s estimate of $1.85/share, which is a bit peculiar since the traditional “beat the Street” earnings game is accomplished by guiding Wall Street analysts to an earnings consensus that is slightly below the posted result.

The revenue growth rate was truly impressive. For Q4 2018 vs. 2017, revenues jumped 38.2%. For the full year, revenues grew 30.8%. However, without question AMZN’s free 2-day shipping associated with its Prime membership is the driving force behind sales growth. But at what cost? The table below shows AMZN’s revenue growth rate plus cost and operating margins from 2005 – 2007. The data is from AMZN’s 10-k filings.

Cost of fulfillment is the cost of de-stocking an item and getting it to the customer’s doorstep. The fourth line item above shows fulfillment costs over time. As you can see, the cost of fulfillment as a percentage of revenues has doubled since 2006. For every dollar of revenue, AMZN spends nearly 23 cents getting inventory delivered to end-users.

You can read the rest of this article here:   Amazon’s Deceptive Accounting Games

I also publish the Short Seller’s Journal, which is a weekly newsletter that provides insight on the latest economic data and provides short-sell ideas, including strategies for using options. You can learn more about this newsletter here:  Short Seller’s Journal information.

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The Accounting Ponzi Scheme Is Catching Up To Amazon

“‘Faith’ is defined as “belief without evidence.” AMZN is a stock investment that thrives on
investor faith. Investor greed transforms into irrational faith when the faith is rewarded with stock gains. This will ultimately burn out but it’s impossible to predict timing. The stock is trading at 178x TTM net income. This is an insane multiple for a company with a deteriorating business model that is under attack from all angles by large, well-capitalized competitors who specialize in Amazon’s business segments.

Having said that, I continue to believe that money can be made trading AMZN from the short side but it requires discipline and diligent capital management. Amazon is one of those stocks in which you need to maintain some short exposure because, when it finally goes, it will go quickly and you’ll be waiting for a big bounce to short that will never materialize” – excerpt from the latest Short Seller’s Journal

In last week’s issue of the Short Seller’s Journal, I did an in-depth analysis of Netflix’s (NFLX) accounting and demonstrated how NFLX manipulates GAAP accounting to manufacture fake net income. I advised subscribers to short NFLX on Monday at $188. This week I focus on the key areas of Amazon’s quarterly financials and show how Jeff Bezos transforms actual negative free cash flow into the Bezos $9.6 billion LTM “free cash flow.”

I also demonstrate the ways in which Amazon’s business model is beginning to break down – that it’s e-commerce model is under attack from all angles by well-capitalized, more profitable retailers like Walmart and its cloud computing business is being attacked aggressively by traditional software development and applications companies like MSFT, IBM, GOOG and ORCL.

On a year over year LTM basis, the amount of cash burned by AMZN has increased 89.2%, from negative $2.476 billion to negative $4.685 billion. – this seek’s Short Seller’s Journal shows why this statement is fact. Recently subscribers have cleaned up on Chipotle (CMG), Sears (SHLD), Beazer (BZH) and others. This week’s issue shows why AMZN will eventually be a home run short. You can learn more here: Short Seller’s Journal info.

AMAZON.CON – ROFLMAO

If this is the case, the true reality beneath Bezo’s fraudulent accounting had to have been horrific:

Amazon’s quarterly profit misses estimates, shares tumble

From Reuters – LINK:  

Amazon.com Inc reported a lower-than-expected quarterly profit on Thursday as expenses rose and the company provided a disappointing fourth-quarter revenue forecast.

The growth of AMZN’s cloud business is rapidly slowing down.  This has been one of my key arguments about the insanity of the market cap attributed to AMZN’s cloud business. It’s tiny compared to AMZN’s overall revenues.  And competition in the cloud space is going to become ferocious as Microsoft, Google and Oracle begin to really flex their muscles.

The only question left for me is to determine which between AMZN and TSLA is biggest Ponzi scheme in history.  AMZN is maybe a $10 stock and TSLA is likely worth $2.